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Activism not activists

A number of high-profile cases of shareholder activists putting company boards under pressure does not mean that boards should overreact. Nevertheless, boards, legal teams and IR should be prepared to respond to an activist.

Not all activists are the same, nor do they want the same things. The stereotypical corporate raiders of the 80s and 90s still exist, but they have been joined by the “sons of activists” who tend to take a longerterm view than the greenmailers of old. More traditional shareholders are now also employing activist methods to agitate for change or increased return. The bottom line is that these days every shareholder is a potential activist and therefore the issue is not one type of activist, but activism generally. This also means that a broader range of companies may now be approached. The professional activists were historically priced out of targeting large cap companies by the cost of taking a ‘significant enough’ stake to have influence. Now that activism may come from your current shareholder base, the financial amount a shareholder has to put at risk is becoming less relevant.

While not all activists are successful, (indeed research suggests that as many as 50% of all activist approaches do not result in any change of strategy by a company), it is clear that boards should be prepared to deal with activism arising more frequently and from a number of different quarters.

The bottom line is that these days every shareholder is a potential activist and therefore the issue is not one type of activist, but activism generally.

Preparation

If a company is already considering its strategy, operations and governance properly and is already communicating properly with its shareholders then arguably there is no need for it to do anything in anticipation of activist interest although, as is the case with all potential unwelcome corporate events, it is wise to have agreed governance and communications processes to be followed if an activist emerges.

The fear that an activist may emerge can, however, have a positive impact by encouraging a company to look at itself from a different perspective and spot issues that it might not otherwise spot. For example:

1

by asking what issues an activist might raise, a company may identify issues that it ought to be considering or, at the very least, questions to which it needs to have a well-articulated answer. It is generally helpful to have outside assistance in relation to this because, as critical friends, outsiders can ask difficult questions that might otherwise remain unasked.

2

the company may consider whether it really is getting clear, open and honest feedback from its shareholders. Many companies have believed that they have highly supportive shareholders and then found, to their cost, that there are issues which concern the shareholders. Once again, obtaining external help in relation to shareholder communications is likely to be wise.

Legal rights and commercial tactics

Activists know their legal rights. Before taking a position in a company an activist will have researched the relevant law and will be prepared to make use of every right available to it and even exaggerate its rights with a view to testing the knowledge and resolve of the target company. In our experience, companies are frequently much less well informed about the activist’s rights than the activist itself is. This may result in one of a variety of problems. For example:

  • the company may become unduly fearful because it overestimates the powers of the activist;
  • the company may be complacent because it ignores the rights of the activist; or
  • the company may find itself caught out by not knowing how to respond to a demand of the activist in a pressure situation (e.g. a general meeting).

In fact, activists’ rights are real but limited – and will, of course, vary from jurisdiction to jurisdiction. Having regard to the fact that they will generally only hold a small proportion of the share capital, their main rights are likely to comprise the right to convene a general meeting (although frequently they will not hold the 5% of the voting rights needed in the UK to do this), the right in the UK to require that particular resolutions be considered at a general meeting (although this right is limited and may be completely nullified by the company’s articles), the right to exercise other rights of any shareholder at a general meeting, and the right to obtain a copy of the share register.

The consequence of this is that an activist cannot on its own achieve very much but it can make a nuisance of itself and seek to mobilise other shareholders and, in particular, make the life of the directors uncomfortable, particularly around the time of the Annual General Meeting and at the meeting itself. Preparation for things that may happen at an Annual General Meeting is particularly important if there is any possibility of an activist emerging. Put simply, the company needs to make sure that it is as up to speed in relation to the law of meetings as the activist is.

Companies frequently feel that they have very few rights in relation to an activist. This is largely based on the absence of legal constraints on the activist. In reality, the main right of the company is a negative one: it is under no obligation to do anything in response to the activist. Whether or not this is appropriate will very much depend upon the activist and the circumstances but, properly used, this is a powerful right.

In summary, issues for boards to consider

One

Do you regularly think about the issues an activist might raise? If so, have actions been followed up?

Two

Are you satisfied that you genuinely have a steady dialogue with key shareholders to keep them abreast of some of your decisions – and the reasons for them? A consistent, clear and open communications strategy will be much more effective than having to explain things if an activist appears.

Three

Are you aware of an activist’s rights?

Four

Do you have processes in place in case an activist emerges? A communications plan, for example, might help you engage with activists without being bumped into making statements you might later regret.